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ProMarket.org - The blog of the Stigler Center at the University of Chicago Booth School of BusinessMon, 19 Nov 2018 17:04:43 +0000en-UShourly1https://wordpress.org/?v=4.9.8https://promarket.org/wp-content/uploads/2016/03/M-32x32.pnghttps://promarket.org
3232How the FTC Protects Strong Employers and Targets Weak Workershttps://promarket.org/how-the-ftc-protects-strong-employers-and-targets-weak-workers/
Mon, 19 Nov 2018 16:59:31 +0000https://promarket.org/?p=10349Since the 1970s, the US has seen a growing power imbalance between workers and employers. This story was not inevitable, but the product of conscious legal and political choices.

Editors’ note: In the last few weeks, the Federal Trade Commission has been holding a series of public hearings to discuss whether competition enforcement policies should be updated to better reflect changes in the US economy, namely market concentration and the proliferation of new technologies. The FTC hearings, which will be held throughout the fall and winter, cover topics as varied as privacy and big data, the consumer welfare standard in antitrust and labor market monopsonies. In order to provide ProMarket readers with a better understanding of the debates, we have asked a number of selected participants to share their thoughts on the topics at hand.

One of the major and still under-appreciated trends in American society over the past 40 years is the emergence of a large gap between labor productivity and wage growth. During the postwar era, productivity and wage growth tracked each other quite closely. In a given year, if median labor productivity increased by 4 percent, median wages also increased by approximately 4 percent.

Between 1973 and 2017, however, median labor productivity grew 6.2 times faster than median pay. In other words, we have seen a steady increase in productivity, but wages have only grown modestly. Workers have become substantially more productive, but they have been unable to reap the benefits. This is, in large measure, a story of strong employers and weak employees. As significantly different trends in other nations show, this was not inevitable. It was a product of conscious legal and political choices.

I would argue that, among others, antitrust enforcers bear some blame for this current power imbalance between workers and employers. First, they bear some responsibility for the strengthening of employers: Most labor markets in the United States are highly concentrated—indeed, according to Azar, Marinescu and Steinbaum, a troubling number of local labor markets are pure monopsonies, leaving affected workers with only one actual or prospective employer. This problem is especially acute in rural and ex-urban areas. Millions of workers, as a result, have few potential places to work and are at the mercy of employers. This concentration has material effects. Relative to a less concentrated labor market, a more concentrated market is associated with 17 percent lower posted wages.

The monopsony problem extends behind the confines of discrete labor markets as understood by antitrust enforcers and scholars. Concentration at one level of a supply chain can have ripple effects upstream, to the detriment of workers. For instance, powerful retailers like Amazon or Walmart exercise power over their suppliers and apply downward pressure on input prices. Under the thumb of large retailers, squeezed suppliers, in turn, seek to contain costs by cutting wages and benefits. Recent research by Nathan Wilmers has found that this ripple effect up supply chains explains at least some of the wage stagnation we have seen since the 1970s. Looking more broadly at industrial structure, another study found that high product market concentration increased the share of national output going to profits by “over $1.1 trillion in 2014, or $14 thousand per employee (nearly half of median personal income in the U.S.).”

Unfortunately, antitrust enforcers have failed to grapple with this problem. By all appearances, they have assumed that labor markets are generally competitive. For example, a merger has never been stopped solely on labor market grounds.

Turning to the other half of the equation, weak employees: most individual workers lack power in labor markets. The unionization rate in the private sector is under 7 percent today. In contrast, during the postwar era, collective bargaining was an important contributor to the egalitarian distribution of income and wealth. In our more recent three-decade period, the big business-led destruction of collective bargaining rights is an important contributor to resurgent inequality.

Antitrust enforcers have compounded this problem. They have impeded organizing among an important and growing sector of the labor force, independent contractors, who are estimated to be about 20 million in today’s economy. Unlike workers who are classified as employees, independent contractors are not entitled to an antitrust exemption and legally cannot engage in many forms of collective action. Exploiting this somewhat artificial gap in the scope of the antitrust exemption, the FTC has brought cases against, among others, ice skating coaches, music teachers, public defenders and organists, and has also weighed in against collective bargaining rights for home health aides and ride-sharing drivers.

At present, the FTC protects strong employers and targets weak workers. The net effect of the FTC’s actions is to tilt labor market power further in favor of employers. Going forward, I hope the FTC, as well as the DOJ, invert these priorities and target strong employers, including through merger law, and allow all workers to organize.

Sandeep Vaheesan is legal director at the Open Markets Institute. He previously served as a regulations counsel at the Consumer Financial Protection Bureau, where he helped develop and draft the first comprehensive federal rule on payday, vehicle title, and high-cost installment loans.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Editors’ Briefing: This Week in Political Economy (November 11-18)https://promarket.org/editors-briefing-this-week-in-political-economy-november-11-18/
Sun, 18 Nov 2018 12:14:31 +0000https://promarket.org/?p=10313Facebook’s latest scandal leads lawmakers to proclaim: “Big tech can no longer be trusted”; New Yorkers vow to resist Amazon’s HQ2 deal; monopolization is undermining public faith in capitalism; and why are US drug prices so high?

Facebook Under Fire. Again.

Another week, another Facebook scandal: this week’s bombshellNew York Times report by Sheera Frenkel, Nicholas Confessore, Cecilia Kang, Matthew Rosenberg, and Jack Nicas included a number of damning revelations. Chief among those was Facebook’s hiring of a Republican opposition research company—Definers Public Affairs—that sought to discredit critics of the company (including the Open Markets Institute and its Freedom from Facebook coalition group) by planting fake news stories that linked them to Jewish billionaire George Soros, a known anti-Semitic trope. At the time, Facebook was also reportedly lobbying the Anti-Defamation League to cast the very same critics as anti-Semites. Other revelations included Senate Minority Leader Chuck Schumer (D-NY) running interference on behalf of Facebook to get Sen. Mark Warner (D-VA) to tone down his criticism of the company, and Facebook executives—including COO Sheryl Sandberg—ignoring and allegedly attempting to conceal the full extent of Russian activity on the platform prior to the 2016 US presidential election.

Reactions to the Times report were unsurprisingly harsh. “Facebook cannot be trusted to regulate itself,” wrote the Times’ editorial board: “Only Congressional hearings can answer what the company knew about Russian meddling—and when.” “Facebook betrayed America,” wrote The New Republic’s Alex Shephard. “Mark Zuckerberg promised Congress he would combat the spread of conspiracy theories—while his company was doing the opposite.” Open Markets’ director Barry Lynn, whose organization was the target of the smear campaign, wrote:

“… we are angry. Broadly, Facebook’s actions show a profound disregard for public authority, democratic institutions, and the security of the United States. More specifically, Facebook’s tactics were designed to intimidate us and ruin our professional credibility and personal reputations.

But we are also deeply encouraged. Facebook’s attacks demonstrate better than any statement that Mark Zuckerberg, Sheryl Sandberg and other executives at the corporation are truly scared of the antimonopoly powers of the U.S. government.”

Mark Zuckerberg and Sheryl Sandberg themselves both denied any knowledge of Facebook’s involvement with Definers and the campaign to discredit Facebook’s critics, saying that the oppo research firm was hired by the company’s communications team and that they only learned about the relationship through the Times report. Facebook quickly severed its ties with Definers (whose tactics reportedly included tallying “how much each senator spent on Facebook ads and how much they had received in campaign donations from Facebook or other big tech companies”) and issued a rebuttal to the “inaccuracies” in the Times story. During a Q&A session with Facebook employees on Friday, Zuckerberg denied claims of a “cover-up.” Days before, he posted a 4,500-word “blueprint” for content moderation that promised, once again, to downgrade “sensationalist and provocative” content.

Yet this latest Facebook scandal will likely lead to much more political scrutiny. The revelations are a“chilling reminder that big tech can no longer be trusted,” Sen. Richard Blumenthal (D-CT) told Recode. Blumenthal, along with fellow Democratic Senators Amy Klobuchar (D-MN), ChrisCoons (D-DE) and Mazie Hirono (D-HI), sent a letter to the Justice Department calling for Facebook to be investigated for potential campaign finance violations. Coons, Sen. Bob Corker (R-TN) and Sen. Ron Wyden(D-OR) also called for new regulations on Facebook. “A corporation that stoops this low in response to legitimate criticism should not be trusted with your personal information,” Wyden told Recode. “Facebook needs to stop treating this like a PR crisis and Washington needs to stop treating this like a partisan opportunity—this is a real national security threat,” said Sen. Ben Sasse (R-NE). “This staggering report makes clear that Facebook executives will always put their massive profits ahead of the interests of their customers… It is long past time for us to take action,” tweeted Rep. David Cicilline (D-RI), who’s likely to become the next chairman of House Judiciary Committee’s antitrust panel.

Meanwhile, calls to break up Facebook are increasing. “Facebook has lost its right to be trusted. It’s time to seriously consider breaking it up,” tweeted Harvard law professor Laurence Tribe. “It’s time to treat Facebook like the ruthless monopoly it is,” writes New York Times columnist Michelle Goldberg, who called Democrats to “un-friend Facebook.” In Slate, Siva Vaidhyanathan takes a more pessimistic view of the current moment: “as long as advertisers, authoritarians, and Chuck Schumer protect it, Facebook will face little significant pressure in most of the world,” he writes. In The American Prospect, Ganesh Sitaraman proposes ways to regulate digital platforms based on three simple principles: “quarantine, nondiscrimination, and regulation of rates.”

From Axios: “The millionaire funding the campaign to break up Facebook.”

The seemingly never-ending spate of Facebook-related scandals has severely hurt employee morale within the company, according to both Bloomberg and the Wall Street Journal. “Just over half of employees said they were optimistic about Facebook’s future, down 32 percentage points from the year earlier,” the Journal reports, citing an internal survey taken by nearly 29,000 Facebook employees. “‘Why does our company suck at having a moral compass?’” asked one employee quoted by Bloomberg’s Sarah Frier. Computer science students don’t appear too eager to work for Facebook these days as well. The company is also facing what appears to be a fledgling revolt by some horrified advertisers. This latest scandal may be “the straw that breaks the camel’s back,” Rishad Tobaccowala, chief growth officer for the ad giant Publicis Groupe, told the New York Times’ Sapna Maheshwari. “Now we know Facebook will do whatever it takes to make money. They have absolutely no morals.”

In other Facebook news: Earlier this week, the New York Timesreported on Facebook’s failure to closely monitor what smartphone makerswho were granted access to the personal data of hundreds of millions of people, “most of whom had not explicitly given the company permission to share their information,” did with that information. Prior to the 2016 election, Facebook pressured the founder of Oculus, then a Facebook employee, to say that he supported Libertarian candidate Gary Johnson over Donald Trump, reported the Wall Street Journal. And Colin Stretch, Facebook’s general Counsel who announced he was the leaving the company in July, will be staying into 2019.

In his new book The Curse of Bigness, Columbia Law professor Tim Wu proposes breaking up Facebook, along with Google and Amazon. Vox’s Kaitlyn Tiffany and The Nation’s Christopher Shay talk to him about it. Wu himself took to the New York Times this week to explain the connection between an increasingly-monopolized economy and the recent rise of neofascism. In Wired, an excerpt from Wu’s book explores “how Google and Amazon got away with not being regulated.”

In The Atlantic, Alexis C. Madrigal compares the tech industry’s recent fall from grace to that of the transcontinental railroads. “There was a time when Americans loved and talked about the transcontinental railroads the way we loved and talked about the Internet,” he writes.

Amazon Sparks Outrage

Amazon’s decision to split its second headquarters (“HQ2”) between Long Island City in Queens and Arlington, Virginia (along with a new operation center in Nashville) provoked a swift and fierce backlash, despite Amazon’s promise to bring 25,000 jobs to each of the two locations. While Amazon touted the economic benefits of the deal, critics focused on the massive government subsidies it was offered in exchange: $1.5 billion in New York and $573 million in Virginia. In New York, where local residents and politicians vowed to resist the deal, Amazon could receive about $48,000 in subsidies per job, according to The Verge. In The Intercept, David Dayen and Rachel M. Cohen cited an analysis by Good Jobs First, an organization that tracks corporate subsidies, which claimed that the government handouts to Amazon will amount to at least $4.6 billion—more than double the reported amount.

New York Governor Andrew Cuomo (who previously joked that he’ll change his name to “Amazon Cuomo” in order to secure the HQ2 deal) and mayor Bill de Blasio attempted to defend the deal by touting the prosperity they claimed it would bring, but the corporate giveaways to Amazon sparked a great deal of outrage. “Amazon is a billion-dollar company. The idea that it will receive hundreds of millions of dollars in tax breaks at a time when our subway is crumbling and our communities need MORE investment, not less, is extremely concerning to residents here,” tweeted Democratic Rep.-elect Alexandria Ocasio-Cortez (D-NY).

New York City council members and state legislators called for an investigation into the Amazon deal, which reportedly includes a non-disclosure agreement meant to keep many of its details secret [it also includes a helipad for Jeff Bezos]. “What we’ve seen here is a process that no American city should have to endure. A governor and a mayor who claim to be progressive Democrats throwing nearly $3 billion at the richest man in the world and then promising a secretive grease-the-wheels process that avoids ‘messy’ public votes and hearings that might muck up the works,” City Councilman Jimmy Van Bramer told Bloomberg. Van Bramer, who represents Long Island City’s district, said city council members were shut out of the negotiation process and only learned that the deal had been finalized by reading about it in newspapers. “Part of the deal involves a state takeover of land involved so that the City Council would have no zoning oversight,” Bloomberg reports.

In The New York Times, J. David Goodman contends that those opposing the deal face a “daunting” challenge. “The deal reached between Gov. Andrew M. Cuomo, Mayor Bill de Blasio and Amazon was explicitly constructed to minimize the ability of local politicians to block it. The company would not agree to come to New York City, Mr. de Blasio said, unless it could be assured it would not have to go through the lengthy process of approvals that would give the City Council veto power,” he writes. “Why did they usurp the ability of the Council to do its job? Because it’s not good for our community,”newly-elected assemblywoman Catalina Cruz told the Times. Even in the normally business-friendly National Review, Jim Geraghty acknowledges that the “critics of the Amazon deal have valid reasons to oppose it.”

Meanwhile, Amazon’s choice of “the most predictable places imaginable,” after a 14-month search during which it solicited bids from dozens of cities across the US, has caused some to label the whole ordeal as a “con,” a “swindle” and “a cynical game.” “Amazon has emerged in recent years as the leading beneficiary of corporate welfare, pocketing more than $1.6 billion in state and local tax breaks and subsidies (including more than $230 million this year alone) for construction of its data centers and warehouses since 2000,” writes The American Conservative’s Daniel Kishi. “With many government officials operating as if economic development is a zero sum game, Amazon will continue to foment localized bidding wars that pit city against city, county against county, town against town,” he opines.

“Amazon’s HQ2 spectacle isn’t just shameful—it should be illegal,” writes Derek Thompson in The Atlantic. “Every year, American cities and states spend up to $90 billion in tax breaks and cash grants to urge companies to move among states. That’s more than the federal government spends on housing, education, or infrastructure.” In the New York Daily News, Matt Stoller writes that the Amazon outrage “isn’t just about subsidies. It isn’t that merchants, or local businesses, or warehouse workers, or communities are being mistreated or misled. It’s that Amazon has so much power over our political economy that it can acquire government-like functions itself. It controls elected officials, acquired the power to tax, and works with government to avoid sunshine laws.” Jeff Bezos, for his part, argued this week that Amazon isn’t really all that powerful, claiming that “Amazon is not too big to fail” and predicting that “one day Amazon will fail… Amazon will go bankrupt.”

Also, don’t miss Luigi Zingales’s take on the Amazon deals: “Subsidies to Amazon are uneconomical, un-American, and unconstitutional.”

Atlanta, Georgia was one of the many municipalities that bid for a shot at hosting Amazon’s HQ2. The Atlanta Journal-Constitution’s Greg Bluestein offers a “glimpse” of the incentives Georgia offered Amazon to try to lure the company to the state, among them more than $1.3 billion in tax benefits and an on-site “Amazon Georgia Academy” that would have “operated with the help of the University System of Georgia and the state tech college system,” offering a “24-week boot camp program for staffers, undergraduate and post-graduate coursework, and state-sponsored recruiters to help fill the company’s jobs.” Had the offer been accepted, writes Bluestein, the state would have paid to build the academy and for the first five years of operating costs–“including salaries of professors and recruiters.”

Monopolization Is Undermining Public Faith in Capitalism

“Whether they were created by cronyism or genius, if extraordinary profits are maintained for many years with no sign of new entrants, it is a clue that competition may not be working,” writes The Economist’s Patrick Foulis in a special multi-part report on how dominant companies—especially but definitely not limited to the technology sector—are undermining public faith in capitalism across the West. The report also mentions the Stigler Center conference on concentration and digital platforms that took place in Chicago earlier this year.

From the New York Times: Nearly a year after the GOP’s $1.5 trillion tax cut, economic growth has accelerated. Wage growth, however, has not. Companies are buying back stocks and instead of creating jobs, they’re cutting them: “Since the tax cuts were passed, the 1,000 largest public companies have actually reduced employment, on balance. They have announced the elimination of nearly 140,000 jobs—which is almost double the 73,000 jobs they say they have created in that time.”

Theresa May’s proposed Brexit deal led to one of the most turbulent weeks in British politics in recent memory. “Britain has reached a new worst-case scenario on Brexit,” writes Sebastian Mallaby in Washington Post.

From OpenSecrets.org: having lost many of its big bets in the 2018 midterm election, the Koch donor network is apparently changing its approach. CNBCreports that the donor network is “mounting a multimillion-dollar campaign to push some key priorities—such as immigration reform and free-trade initiatives—before Democrats take over the House in January.”

Pfizer will raise prices on 41 prescription drugs in January, reports CNBC. From the New York Times: why are US drug prices so much higher than anywhere else in the developed world?

From the Washington Post: the 1MDB fraud scandal continues to haunt Goldman Sachs. “Goldman Sachs has a 1MDB problem,” wrote CNN’s Julia Horowitz. Goldman Sachs shares had their worst day since November 2011 on Monday, after Malaysia said it was seeking a “full refund” from the bank for its part in the scandal. Goldman Sachs, meanwhile, is attempting to distance itself from the whole thing—with limited success.

Sinclair and five other media companies— Raycom Media, Tribune Media, Meredith Corp., Griffin Communications and Dreamcatcher Broadcasting—have settled a Justice Department antitrust lawsuit that accused them of sharing private information to manipulate TV ad prices, reports the Washington Post’s Brian Fung. In other media news, small cable companies are calling for the Justice Department to reinvestigate Comcast’s merger with NBC.

“Think tanks should disclose their funders in order to participate in public debates,” argues The Guardian’s editorial board: “Think tanks have no electoral mandate. Nor are they mass membership organizations. The legitimacy of their voice in democratic debates rests largely on their intellectual independence. They ought to demonstrate this by revealing who funds them.”

Stigler Center Goings-On

“The appropriate objective for a public company is shareholder welfare, not value,” writes Luigi Zingales in the Financial Times. “Shareholder welfare includes non-monetary benefits, like protecting the environment and freedom. Most of us would sacrifice some money to pursue these values; we want the companies we own to do the same.”

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

As soon as Amazon announced the location of its new headquarters, an intense media battle started on the rationality of the fiscal subsidies offered by the two chosen states to attract the new headquarters.Was it a good idea for New York and Virginia to offer $1.5 billion and $573 million respectively to stir Amazon’s decision?

In each of the two chosen locations Amazon will invest billions in infrastructure, employ as many as25,000 people directly (and many more indirectly), and bring billions in new tax revenues. Even the generous fiscal benefits offered by the two locations seem small vis-à-vis the additional fiscal revenues the winning states will enjoy. After all, had Amazon chosen New Jersey over New York, the Empire State would have lost up to $14 billion in new tax revenues over the next 25 years. Why shouldn’t a state pay a fraction of these enormous benefits to secure Amazon’s headquarters?

While appealing, this argument is flawed and—as it turns out—self-defeating. When companies compete for customers, they have to offer better products or lower prices. They are forced to innovate and improve efficiency in production. In economist lingo, product market competition is not a zero-sum game (my gains are equal to your losses), but a positive-sum game (my gains exceed your losses). By contrast, corporate competition for state subsidies is a zero-sum game. Amazon is not going to be more productive in New York than in New Jersey –it will only pay fewer taxes. If companies are successful in pitting one state against another, they will end up paying no state taxes. As a result, the economy will not be one iota more efficient, and the rest of us will end up paying more taxes to make up for the revenue shortfall.

Competition for subsidies also fosters crony capitalism and hurts productivity growth. It fosters crony capitalism because it favors companies that are well-connected, rather than companies that are more efficient. A recent paper shows that companies are more likely to receive subsidies when they make financial contributions to political candidates in the state. Competition for subsidies also hurts productivity growth because it forces companies to dedicate time and resources to influencing the political choices, rather than innovating and improving productivity. Anne Kruger labels these wasteful activities aimed at obtaining privilege as rent-seeking. In many circumstances, all the subsidies obtained by companies are wasted in rent-seeking activities. In such cases, competition for subsidies is not simply a zero-sum game, but a negative-sum game. Thus, corporate subsidies are uneconomical.

Corporate subsidies inflict an even greater harm to product market competition. Not all companies can pit one state against another. A small grocery store cannot get the governor’s attention by threatening to move across state borders. As a result, small stores will face the full burden of local taxation, while large ones receive tax exemption and subsidies. Not only does this too-big-to-tax policy distort product market competition, it is fundamentally un-American. In 1773, Boston patriots threw British tea into the harbor to protest the tax favored status of the British East India Company, which was able to underact American importers not because it was more efficient, but because was tax favored.In other terms, the American Revolution started as a revolution against those large corporations that use their political power to distort competition to their advantage. In these cases, corporate subsidies are not only are uneconomical, they are also un-American.

Aware of the distortions produced by corporate subsidies, the European Union has explicitly prohibited them. Ireland cannot attract businesses by offering lower corporate tax rate to specific companies; instead, it can attract businesses by offering a low tax rate to all. This rule has prevented the worst forms of beggar-thy-neighbor fiscal policies

Paradoxically, a similar rule can also be found in the US constitution, as interpreted by the Supreme Court inMaryland v. Louisiana, 451 U.S. 725, 754 (1981):

“One of the fundamental principles of Commerce Clause jurisprudence is that no State, consistent with the Commerce Clause, may “impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.” This antidiscrimination principle “follows inexorably from the basic purpose of the Clause” to prohibit the multiplication of preferential trade areas destructive of the free commerce anticipated by the Constitution.”

I am not a lawyer. As an economist, however, I can state with certainty that there is no difference between discriminating through taxes and discriminating through subsidies. I can also say that preferential trade areas and preferential treatment for some companies are equally destructive of free commerce. Hence, it is not unreasonable to argue that these types of corporate subsidies are even unconstitutional.

The problem is not Amazon or New York. Foxconn received a similarly outrageous subsidy from the state of Wisconsin just a few months ago. The problem is a system that with the pretense of helping business destroys free markets.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Obesity and Globalization: Evidence from Mexicohttps://promarket.org/obesity-and-globalization-evidence-from-mexico/
Thu, 15 Nov 2018 06:53:10 +0000https://promarket.org/?p=10289Has Mexico imported its obesity epidemic from the United States? A new study suggests that the answer to this question is “yes.”

The obesity epidemic has reached the Global South. Today, the region hosts some estimated 62 percent of obese individuals in the world (Ng et al., 2014). Developing countries have seen a threefold surge in overweight rates over the period 1980 to 2008 (Keats and Wiggins, 2014). Over the same period, emerging economies have become increasingly exposed to international trade in foods.

Are globalization and international trade the culprits to blame for the astonishing obesity trends? Many policy makers and the media seem to think so. The World Health Organization (WHO, 2015) for one has been advocating to integrate health concerns into trade policies. In the much discussed case of Mexico, the New York Times (Dec. 11, 2017) stated that“few predicted when Mexico joined the free-trade deal that it would transform the country in a way that would saddle millions with diet-related illnesses.”

Policymakers in the Global South are rightly worried: Obesity is costly—both economically and health-wise (Cawley, 2015). Their countries are currently facing a “nutrition transition,” during which diets gravitate towards processed foods, animal fats and sugars as income levels rise. And some countries’ health systems are likely to suffer from a double disease burden, at least in the medium term, as they are still grappling with traditional health problems including undernutrition.

The obvious policy question is: How can countries effectively manage this transition while still benefiting from the perks of globalization? In our recent research on Mexico, we show how the country has imported (at least in part) its obesity epidemic from the United States.

Has Mexico Imported Obesity From the United States?

Mexico’s obesity rate grew from 10 percent to 35 percent over the period 1980–2012 (according to our analysis sample including adult females). The country is now among the “heavy weights” in the OECD, second only to the United States when it comes to obesity rates (OECD, 2017). As diets and population health were in flux, so was trade; over the very same period, Mexico engaged in intense economic integration with the United States, including the creation of NAFTA. Today some 80 percent of Mexican food imports arrive from its northern neighbor. In figure 1, we illustrate Mexican imports of Foods & Beverages from the United States over time. While overall food imports have risen, the “unhealthy” type has done remarkably so. Notably, exports of “food preparations” are 23 times bigger in 2012 than in 1989.

Figure 1: Mexican imports of Food & Beverages from the United States over time

Figure 2 depicts Mexican food imports from the United States falling into unhealthy and healthy categories based on the USDA Dietary Guidelines. While Mexico has also imported healthy foods (such as dark green veggies), food imports have been increasingly concentrated in unhealthy ones (think sugar-sweetened beverages).

These trends invite a natural question: Is there a causal link between increased trade integration in food markets and surging obesity rates (Rogoff, 2017)? Or is this a purely spurious association? Our recent study suggests the former: Trade integration (in foods) has accelerated the country’s nutrition transition.

Estimating Weight Gains From Trade in Foods

In our recent working paper (Giuntella, Rieger and Rotunno, 2018), we study the impact of US food exports on obesity rates across Mexican states from 1988 to 2012. Our study combines several rounds of anthropometric and household expenditure surveys with product level food trade data. We focus on Mexican women, as data for men are only available in later years.

Trade integration is a national or aggregate shock. However, we exploit the fact that not all regions are impacted in the same way (see Dix-Carneiro and Kovak, 2017; Atkin and Donaldson, 2015; and Autor et al., 2013). To quantify the effect of US food exports at the sub-national level, we distribute aggregate food imports to Mexican states based on their historical consumption patterns. More specifically, we ‘impute’ each state’s exposure to trade in foods with its expenditure by food products prior to trade integration. Intuitively speaking, Mexican states that historically consumed a lot of processed foods will also be more exposed to imported processed foods from the United States.

In fact, we find large differences in food expenditure patterns across regions, which lends credibility to our empirical approach. We also control for a series of economic risk factors linked to obesity (such as food prices, GDP, FDI, and migration), as well as temporal trends and state characteristics (such as distance to the US border).

One concern for our analysis is that third factors such as aggregate demand (for American foods) drive both ‘imputed’ food imports by Mexican state and obesity prevalence. This, in turn, can lead us to estimate a spurious rather than a causal link. To net out demand effects and focus on supply-side shocks, we rely on “gravity residuals” (see also Autor et al., 2013). These are estimates of supply-side components of US food exports to Mexico (for instance, US comparative advantage relative to Mexico in third markets).

Quantifying Weight Gains From Trade in Foods

Our empirical results suggest that 422,000 Mexican women turned obese due to trade with the United States from 1988 to 2012. This striking effect is comparable to the one associated with exposure to Walmart supercenter expansions in the United States (see study by Courtemanche and Carden, 2011).

The impact of American food imports on obesity is large compared to those associated with food imports from other countries and total food expenditures of households. In other words, American foods seem more prone to lead to obesity. This pattern is confirmed when we differentiate between healthy and unhealthy components of total trade in foods. Our estimates suggest that it is the latter which drives our overall effects.

Health Inequality and Trade

What we call “weight gains from trade in foods” also varies across socio-economic groups. The unhealthy impacts of food imports are relatively larger among women with no or little education. If one takes a woman with at least a high school degree, her risk of obesity increases by 5 percent as exposure to American food imports moves from zero to the Mexican average. In comparison, a woman with no education faces an increased risk of 8 percent. This amounts to a 3 percent difference in the risk of obesity (see figure 3).

Policy Implications

Economists agree that countries gain from international trade; their consumers may for instance benefit from lower prices, new products or varieties. Here, we present evidence of a perhaps unexpected and likely unwanted gain—a gain in body weight. Our paper complements growing evidence on the adverse health effects of trade, which however has exclusively focused on the health of workers but less so on consumers—see for instance Colantone et al. (2017); McManus and Schaur (2016; and Pierce and Schott (2016).

That said, trade in foods has not triggered but merely accelerated Mexico’s ongoing nutrition transition. Our findings may inform policy makers elsewhere in the Global South as they are opening their markets to food imports from the rest of the world. Countries in the north typically hold a comparative advantage in unhealthy, processed foods. So when liberalizing trade in foods, it may be wise to incentivize healthful imports. Otherwise, trade integration may fuel the nutrition transition, increasing the possibility and length of a double burden of disease.

Osea Giuntella is an Assistant Professor of Economics at the Department of Economics of the University of Pittsburgh. His areas of interest are health, labor and economic demography. He is also a Research Fellow at IZA and at the Global Labor Organization. He obtained his PhD in Economics at Boston University and was a post-doc at the Blavatnik School of Government (University of Oxford) and a Research Fellow at Nuffield College. He has published in journals such as the Journal of Health Economics, Health Economics, Demography, and the Journal of Economic Behavior and Organization.

Matthias Rieger is an Assistant Professor, Development Economics at the International Institute of Social Studies, Erasmus University Rotterdam. His areas of interest are development, health and experimental economics. He is also on the management team of the Rotterdam Global Health Initiative. He completed his PhD in International Economics at the Graduate Institute of International and Development Studies in 2013 and was a Max Weber Fellow at the European University Institute, Florence. He has published in journals such as the European Economic Review, Journal of Health Economics and Demography.E-mail: matthias.rieger@graduateinstitute.ch; Web: http://matthiasrieger.weebly.com.

Lorenzo Rotunno is an Assistant Professor in Economics at Aix-Marseille University. His research interests include international trade, development, and political economy. Previously he was Post-Doctoral Research Fellow at the Blavatnik School of Government and Nuffield College (University of Oxford). He holds a PhD in International Economics from the Geneva Graduate Institute.E-mail: lorenzo.rotunno@univ-amu.fr, Web: https://sites.google.com/site/rotunnoheid/

Keats, S., and S. Wiggins. “Future diets: implications for agriculture and food prices-Report for Shockwatch: managing risk in an uncertain world.” London: Overseas Development Institute and UK Department of International Development (2014).

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Ten Years After the Financial Crisis: “We Are Safer, But Not As Safe As We Should and Could Be”https://promarket.org/ten-years-financial-crisis-safer-not-safe/
Tue, 13 Nov 2018 07:06:05 +0000https://promarket.org/?p=10275Experts from academia and industry gathered at the University of Oxford to revisit what went wrong in the run-up to the 2008 financial crisis, whether the actions that were taken since seem sufficient, and the risks that might forestall a new crisis.

The bankruptcy of Lehman Brothers, now ten years ago, was neither the start nor the peak of the financial crisis. Yet, the demise of the iconic investment bank, the fourth-largest in the United States, marked the point at which the unthinkable became real: A landmark institution, loaded with low-quality securities and protected by little capital, teetered—and the government allowed it to fail. As confidence dissipated and uncertainty grew, a total collapse of the financial system seemed not only possible but also plausible.

Ten years later, experts from academia and industry gathered at the University of Oxford to reflect on what happened. As part of a conference on the political economy of finance for early career researchers, the panel was asked to revisit what went wrong, whether the actions that were taken to prevent a repeat of the crisis seem sufficient, and what risks could forestall a new crisis. Sir John Vickers, Warden of All Souls College at Oxford University, former member of the Bank of England’s Monetary Policy Committee and chair of the UK’s Independent Commission on Banking, captured the mood well when he noted: “We are safer, but not as safe as we should and could be.”

What Went Wrong?

Vickers noted that the set of economic circumstances that preceded the crisis, although extraordinary, are too often given too much credit for what followed. “It was not a perfect storm. The biggest surprise of the crisis was not the shock, but the fragility it exposed.” Emblematic for that fragility was the leverage in the financial system, which Vickers described as “extreme.” And that is only what we know. Karthik Ramanna, Professor of Business and Public Policy at Oxford’s Blavatnik School of Government, noted that the accounting underlying the capital requirements and the reporting of leverage ratios obscured much leverage: “The tier-one capital [the highest-quality assets that regulators require banks to hold] are full of potentially non-performing assets.” Furthermore, the capital was supposed to be held against the risks generated by the products the banks held or were exposed to. But many of these products, Ramanna noted, were novel, complex, and ill-understood. The fragility we observed by looking at leverage ratios, in other words, was only the tip of the iceberg.

Grace Blakeley, a research Fellow at the IPPR Commission on Economic Justice, argued that fragility was not only endemic in the financial sector but characterized the broader economic model it was a part of. “For decades, returns in the real economy were low, which created global imbalances and a hole in aggregate demand. Financialization helped fill that hole, in ways that we now know may have been artificial and unsustainable.”

Have We Fixed the Financial System?

Following the crisis, there was little debate about the need for reform of the financial system. Instead, much of the debate centered on the question of the design of these reforms. Ten years on, banks have to hold more capital, are subjected to liquidity requirements, face more stringent governance and compliance expectations, and have had to submit resolution plans to aid resolvability in times of crisis.

Despite that progress, Vickers is not satisfied. “The discussion on capital has got to a really weird place. You have the officialdom, with the Governor of the Bank of England [Mark Carney] as a leading exponent, holding the view the system is now sufficiently capitalized. At the same time, others—most economists outside the official sector—stress that leverage can still be thirty [debt of thirty times equity], and instead want to see that multiple much lower, say at ten or even three. I would put my own view between these two; regulators should have increased capital buffers much more than they have.” Emily Jones, Associate Professor at Oxford’s Blavatnik School of Government and chair of the panel, asked why more ambitious regulation of leverage ratios had not been introduced. Vickers suggested that while it may be because “officialdom is right,” it likely was also driven by the process of reaching international agreements, “which tend to reach the lowest common denominator.”

Giles Keating, managing director at Werthstein and a former Global Chief Economist at Credit Suisse, also sounded a cautionary note. He noted that “an awful lot of progress has been made,” citing in particular the increased capital requirements, but stressed that focusing just on regulatory change in banking regulation obscures instabilities elsewhere in the system. “The financial system is an ecosystem; all parts are closely related. Changes in one area can have effects on different players in different ways. Perhaps, the financial system is more complicated than a natural ecosystem, because there is this layer of players gaming the system superimposed on it.” Even if raising capital requirements for banks was the right idea, doing so without evaluating and mitigating the spillovers that might affect other parts of the financial ecosystem—particularly related to financial activity moving into the more lightly regulated shadow banking sector—is not necessarily a prudent move. Borrowing may have moved outside banks, but that does not necessarily make the financial industry less fragile.

On the question of whether the system is now safer, Blakeley countered with “safer for whom?” She stressed that while regulatory interventions in the aftermath of the crisis no doubt made the financial system more stable, they coexisted in the UK with policies that have done little to address inequality or economic stability for the most vulnerable. She urged that legacies of the financial crisis be seen holistically, rather than analyzing monetary and regulatory interventions separately from fiscal policy, and instead advocated for more comprehensive and robust public interventions to address stagnating wages and faltering productivity growth.

Risks On the Horizon: The Old and the New

Keating expressed concerns that, particularly in the realm of monetary policy, there are spillovers that could plant the seeds of a future crisis. He explained that he holds a “darker” view of the “knock-on effects of regulatory changes.” “As we escaped from the global financial crisis, quantitative easing and ultra-low interest rates were important,” he said. “But this has gone on for too long.” As a consequence, Keating argued, we now witness the emergence of asset bubbles in the bond market and debt levels that are even higher than before the crisis (resulting in dangerously high leverage in the US corporate sector). Keating argued that this has been made worse by a lack of coordination by monetary policymakers, citing the example of how Japan’s low target for ten-year government bond yields might have encouraged people to move their capital abroad. “This is yet another example of unintended policy spillovers.”

“We have to wonder how this will end,” Keating concluded. “This year’s crises in emerging markets are merely a foretaste. As inflation comes back into the system, which is inevitable now that central banks (led by the US Federal Reserve) have to begin to raise rates, the weakest parts of the system are squeezed first, as is always the case at the end of a credit cycle.” This will affect emerging markets, but also corporate debt—particularly but not exclusively in the United States. The fact that market-making, as a consequence of regulatory reform, is not as easy as it once was only makes matters worse. “The good news, however, is that the banking system is safer. This matters a lot, as this is the store of value for many people and the way that many financial transactions are processed.” But banks, he cautioned, will not be exempt from the nasty credit cycle entirely.

Apart from capital standards being too low, the unresolved challenges relating to accounting standards in capital regulation remain a source for concern, Ramanna noted: “Major banks in Europe have very low price-to-book ratios—essentially the market’s assessment over the accountant’s assessment. If the market is right, there is a very substantial over-measuring of capital in the bank.” The regulation, and the stress tests used by central banks to evaluate the bank’s resilience, rely on the accounting measure. Ramanna: “These tools are only as good as [the accounting numbers] that go in there.” Vickers suggested that banks with low price-to-book ratios should be subjected to additional stress tests that are based on market measures of capital.

Keating was supportive of the idea, noting that it would help regulators to use the information produced by markets and also help overcome some of the informational asymmetries governments suffer from when regulating financial institutions. At the same time, he was skeptical that the proposal would be implemented. “Looking at the price-to-book ratios of banks, you can very clearly see the variation across countries and regions. US banks are performing relatively well, but the same cannot be said about their European counterparts.”

Blakeley claimed that expertise is (still) divided unequally between the private sector and the government, which makes it harder for government to effectively regulate the financial system. Explaining how patterns of regulatory influence can be skewed, she said: “This is a matter of money and power…. It erodes the trust in government.”

Finally, drawing attention to the larger economic context, Ramanna stressed future political challenges arising from computerization and the changing structure of work in advanced economies. Noting that most advanced economies, especially the UK, experienced stagnating productivity growth, he argued that future economic growth was likely to come from technology and computerization. This will result in a massive transformation of the labor market—recent research by Carl Frey and Michael Osborne at the Oxford Martin School has suggested up 47 percent of jobs are vulnerable to computerization. Managing such a disruptive change in the economy equitably and fairly will be a major political challenge going forward.

A Call to Action

In the end, the key to preventing crises is to be aware of the developments around you and critically evaluate them. Vickers spoke frankly: “Many who should have known what was going on—also in academia—were totally unaware. For example on the ballooning of leverage, I should have known, but I did not.” He concluded that engagement is key, too: “When the Bank of England consulted on extra capital buffers for big banks, it received just four responses, and one was mine.”

The academic community can be occasionally slow in engaging with policy makers and challenging the dominant paradigms. Early-career scholars’ remarkable interest in asking difficult questions on political economy of finance, however, suggests there is room for optimism.

The research portion of the conference included presentations from emerging scholars on complex challenges in the political economy of finance, often with deep distributional repercussions. There were three key lessons learnt from junior scholars’ presentations. First, there is a great value in moving beyond disciplinary boundaries to ask important questions. In just two days, presenters showcased the breadth of the emerging scholarship in political economy of finance, ranging from a historical perspective on early 20th century Swiss capital requirements to the recent reforms in Turkey, China, and the United States. At the international level, scholars asked why countries rely on domestic insurance mechanisms (rather than the global financial safety net) and how principles of bankruptcy law can be applied to sovereign debt.

Second, conversations among scholars from different disciplinary backgrounds are essential for gaining a thorough understanding of how markets operate, and the extent to which better cooperation between multiple stakeholders can support sustainable capitalism. Third, to address the most pressing challenges of today’s globalized economy, it is vital for the academic community to engage with practitioners to have a clear voice in the policy arena.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Editors’ Briefing: This Week in Political Economy (November 4-11)https://promarket.org/editors-briefing-this-week-in-political-economy-november-4-11/
Sun, 11 Nov 2018 08:24:43 +0000https://promarket.org/?p=10264The costliest midterm election in US history ends with a victory for Democrats—and for money in politics in general; Amazon and Apple crack down on third-party refurbishers, raising antitrust concerns; and was Amazon’s HQ2 stunt really just a “con”?

The US midterms ended with a victory for Democrats, who have taken control of the House for the first time since 2010. But Tuesday was also a good night for money in politics in general, as Karl Evers-Hillstrom notes in OpenSecrets.org. The 2018 midterms were the most expensive in US history, with Democrats outraising Republicans by more than $300 million. Overall, writes Evers-Hillstrom, 89 percent of House races were won by the biggest spender: “A cash advantage didn’t always translate to success at the polls for congressional candidates. Still, the candidate with more money won most of the time, and fundraising and outside spending trends appear to match up with election results.”

Tuesday was a good night for corporate America as well, as companies that spent millions on attempts to sway voters ahead of high-profile ballot measures largely prevailed. California’s Proposition 8, which aimed to rein in dialysis costs and was fiercely opposed by the dialysis industry, was defeated, leading to a rise in dialysis stocks. Proposition 10, California’s rent-control initiative, was also rejected by voters following a campaign to defeat it that was partly financed by Blackstone. Prop C, San Francisco’s homelessness tax that was at the center of a public battle between tech billionaires Marc Benioff and Jack Dorsey, passed by a wide margin—but may take years to take effect due to legal challenges. Voters in Montana rejected a proposal to expand Medicaid, but voters in Idaho, Utah, and Nebraska all voted in favor of Medicaid expansion. In Washington, voters passed an industry-backed measure that bans future soda taxes in the state, while voters in Oregon rejected a similar initiative. In Nevada, Warren Buffett’s Berkshire Hathaway managed to defend the near monopoly of its electric utility subsidiary NV Energy. And in Portland, Oregon, voters passed a ballot measure that bars corporations from making political donations and limits individual campaign contributions.

Michigan’s Democratic governor-elect Gretchen Whitmer, reports The Intercept’s Zaid Jilani, added a Blue Cross Blue Shield executive to her transition team after the company helped fund her gubernatorial campaign. And President Donald Trump will award the Presidential Medal of Freedom to Miriam Adelson, the wife of Republican megadonor Sheldon Adelson. The Adelsons gave $113 million to GOP candidates during the 2018 election cycle.

In the run-up to the midterm election, companies increased their pressures on employees to vote for candidates endorsed by their corporate lobbyists, report The Intercept’s Lee Fang and David Dayen. “Business groups are increasingly using the workplace as a staging ground to shape the outcomes of elections,” they write.

The Democratic takeover of the House, write William Mauldin and Vivian Salama in the Wall Street Journal, will make it much harder for the Trump administration to pass USMCA, the administration’s makeover of NAFTA.

Facebook also had a reason to celebrate on Tuesday, as it made it through the midterms relatively disaster-free. But more than anything, argues Kevin Roose in the Times, “this year’s midterm election cycle has exposed just how fragile Facebook remains.”

Amazon’s 14-month search for the site of its second headquarters (aka HQ2) seems to have ended with a whimper, as reports surfaced that Amazon would in fact build two new offices, one in Long Island City in New York and the other in Crystal City, Virginia, which is near Washington, DC. After soliciting bids from dozens of cities across the US, Amazon will go ahead with two locations in which CEO Jeff Bezos already owns homes. “This was never a contest,” said Scott Galloway in response.“It was a con meant to induce ridiculous terms that they then took to the cities all along that they knew they were going to be in.” But the truly big prize Amazon will get out of its HQ2 stunt, argued ILSR’s Stacey Mitchell, is not tax breaks—but data. “At the end of the day, it may well be that the data is the most valuable thing that Amazon has gotten out of this,” Mitchell told Business Insider’s Hayley Peterson. “Amazon has a godlike view of what’s happening in digital commerce, and now cities have helped give it an inside look at what’s happening in terms of land use and development across the US. Amazon will put that data to prodigious use in the coming years to expand its empire.”

Meanwhile, opposition to the terms Amazon is likely to receive is growing among New York progressives. The Financial Timesreported this week that Google is planning a major expansion of its own in New York, one that would more than double the number of its employees in the city.

Amazon has removed independent Apple refurbishers off its Marketplace as part of its new partnership with Apple, reports Motherboard’s Jason Koebler. The agreement, tweeted Hal Singer, raises some antitrust issues. “Given Amazon’s dominance as an online retail marketplace, its decision to disregard the first sale rights of resellers will significantly limit consumer choice,” law professor Aaron Perzanowski told Koebler. “The fact that this move was demanded by Apple makes it even more problematic. What we see here are the world’s two most valuable companies engaging in a coordinated assault on the lawful resale of consumer devices.”

Amazon, Facebook and Google are all being looked at by the federal government for potential antitrust violations, President Trump said in an interview with Axios. Following the midterm election, Trump added that he is willing to work with Democrats to regulate social media platforms. While this is not the first time Trump has made this threat, Big Tech should brace for more pressure from Washington, writes the Financial Times’ Richard Waters.

In other tech news, Amazon executives defended its controversial facial recognition technology after employees raised concerns about its aggressive marketing of the technology to law enforcement agencies and the US Immigration and Customs Enforcement (ICE). A week after 20,000 of its employees staged a massive worldwide walkout, Google said it would put an end to its practice of forced arbitration for complaints of sexual misconduct. In an interview with the New York Times, Google CEO Sundar Pichai seemingly defended the company’s controversial development of a censored search engine for the Chinese market by saying that “one of the things that’s not well understood, I think, is that we operate in many countries where there is censorship. When we follow ‘right to be forgotten’ laws, we are censoring search results because we’re complying with the law.” Pichai did add, however, that “it’s not even clear to me that search in China is the product we need to do today.”

From Motherboard: “An ongoing study by Northeastern University and the University of Massachusetts claims that Sprint is arbitrarily throttling Microsoft’s Skype without adequately informing consumers.”

A week after AT&T pulled HBO off of Dish’s satellite service, Tim Wu writes that AT&T’s “brazenly anticompetitive strategy” has been widely predicted prior to the controversial court approval of its merger with Time Warner. “Unfortunately, there is every reason to think AT&T will keep using HBO and other media properties as weapons in the industry. The more it raises prices or withholds content, the more it either harms its rivals or gains new customers for itself. It’s a win-win situation made possible by the merger’s integration of content and content delivery.”

The Justice Department has reached a settlement with Sinclair over Sinclair’s alleged sharing of advertising sales data with certain local television-station owners.

Saudi Arabia may be mired in controversy at the moment, but among Silicon Valley entrepreneurs Saudi capital is as in demand as ever, reports the Wall Street Journal.

PwC’s global chairman, Bob Moritz, argued in the Financial Times last month that the Big Four accounting firms should not be broken up. This week, he was joined by David Sproul, CEO of Deloitte in the UK. KPMG became the first of the Big Four to publicly pledge to stop offering consulting services to large audit clients in order to “remove even the perception of a possible conflict [of interest].”

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Not Your Typical Short Seller: The Stigler Center Hosts Fahmi Quadirhttps://promarket.org/not-your-typical-short-seller-the-stigler-center-hosts-fahmi-quadir/
Fri, 09 Nov 2018 23:54:59 +0000https://promarket.org/?p=10252Quadir, known for betting against Valeant in 2015, will discuss short selling, exposing corporate fraud and thriving in a sometimes-reviled industry lacking diversity in a conversation with Luigi Zingales.

Fahmi Quadir

In the summer of 2015, Valeant Pharmaceuticals—a name now synonymous with corporate greed—was still the darling of Wall Street. At one point a small and struggling pharmaceutical company, Valeant had managed to propel itself into a $90 billion market cap by doing away with the traditional pharma business model, which typically involves heavy R&D spending. Instead, the company went on an acquisition spree, purchasing dozens of smaller drug manufacturers and then drastically hiking the prices of their existing drugs.

For a while, this strategy paid off for Valeant. Its stock rose by more than 4000 percent between 2008 and 2015, peaking at $262. Prominent investors, among them Pershing Square’s Bill Ackman, bet billions of dollars on the company and championed its CEO, J. Michael Pearson, with some even comparing him to Warren Buffett. Other companies began emulating Valeant’s strategy of acquiring smaller rivals, slashing R&D spending and subsequently ordering exorbitant price increases. Martin Shkreli’s Turing Pharmaceuticals is the most notorious example, but far from the only one.

Fahmi Quadir, then a 25-year old equity analyst at the New York hedge fund Krensavage Asset Management, didn’t buy the hype. Quadir, who in college majored in mathematics and biology, recognized the unsustainable nature of Valeant’s business model and, in June 2015, pushed her employers to short the stock. While Valeant’s stock peaked that August, by October it was in free fall: Valeant’s price-gouging tactics had caught the attention of politicians and the press (Hillary Clinton famously railed against Valeant’s prices hikes during her presidential campaign, promising to “go after” the company if elected), with Congress and the SEC launching investigations into its drug pricing strategy and its ties to a mail-order pharmacy called Philidor. The attention also brought increased scrutiny to Valeant’s shoddy accounting, ultimately leading to criminal investigations and convictions. The stock has fallen by more than 90 precent since then and Ackman, having lost more than $4 billion on his Valeant bet, ended up calling his involvement a “huge mistake.” Earlier this year, the beleaguered company attempted a rebranding by changing its name to Bausch Health Companies, but it is still mostly known as the “Enron of pharma.”

Betting against certain companies does not make you popular, and short sellers are often depicted as vultures making money off of turmoil. Yet as the case of Valeant clearly showed, short sellers can also perform a crucial function in exposing weaknesses, fraud and potential wrongdoing. Short sellers like Quadir, John Hempton and Andrew Left were the first to sound the alarm about Valeant and played a central role in exposing its excesses.

Her success in identifying Valeant’s house of cards has made Quadir into a rising star, with her story featured prominently in an episode of Netflix’s Dirty Money dedicated to the Valeant scandal. Hailed as “the real deal” by noted short seller Marc Cohodes, Quadir launched her own hedge fund, Safkhet Capital, in 2017, when she was only 27 years old. In an interview with Bloomberg, Quadir said Safkhet would focus on “identifying frauds and accounting vulnerabilities that could cause a stock to lose more than 60 percent of its market value.” Her ascent also makes Quadir, the American-born daughter of Bangladeshi immigrants, a trailblazer within the overwhelmingly white and male-dominated world of hedge fund managers.

On Monday, November 12, Quadir will visit the Stigler Center for a conversation with Luigi Zingales [one of the editors of this blog] on short selling, regulation, exposing corporate fraud, countering retaliation, and thriving in a sometimes-reviled industry that lacks diversity. Admission is free, but pre-registration is required. You can find more details here.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Why the FTC Should Focus on Labor Monopsonyhttps://promarket.org/ftc-should-focus-labor-monopsony/
Mon, 05 Nov 2018 18:35:52 +0000https://promarket.org/?p=10236Economic theory tells us that firms are more likely to exploit labor market power than product market power in the United States today. And it tells us that the government should devote more resources to labor market litigation than to product market litigation.

Editors’ note: In the last few weeks, the Federal Trade Commission has been holding a series of public hearings to discuss whether competition enforcement policies should be updated to better reflect changes in the US economy, namely market concentration and the proliferation of new technologies. The FTC hearings, which will be held throughout the fall and winter, cover topics as varied as privacy and big data, the consumer welfare standard in antitrust and labor market monopsonies. In order to provide ProMarket readers with a better understanding of the debates, we have asked a number of selected participants to share their thoughts on the topics at hand.

“The Tournament of To-day – a Set-to Between Labor and Monopoly” by Frederick Graetz. From Puck magazine, August 1, 1883.

The US government takes anticompetitive behavior far more seriously when it occurs in product markets than when it occurs in labor markets. The Horizontal Merger Guidelines, for example, direct the government to review mergers for their product market effects and say nothing about evaluating mergers on the basis of their labor market effects.

The Department of Justice and the Federal Trade Commission have launched countless investigations into product market mischief, and have historically ignored labor market abuse. Only in the last decade has labor monopsony flashed onto the government’s radar screen. In 2010, the DOJ sued a group of high-tech companies that had agreed to refrain from poaching each other’s employees. In 2016, the DOJ and FTC wagged a finger at human resources departments, warning them against no-poaching and wage-fixing agreements. Earlier this year, the DOJ announced its first enforcement action pursuant to this guidance. But while these new efforts are welcome, they are paltry compared to the enormous amount of resources that has been put into antitrust enforcement on the product market side.

This raises a question. Why has the government devoted fewer resources to patrolling labor markets than product markets? One possible answer is that the government should focus on product market competition—either because more harm occurs there, enforcement is more effective there, or both. That is probably the answer that a government official would have given a few years ago if anyone had asked him or her. However, this answer is surely wrong.

Since Adam Smith, economists have understood that profit-maximizing firms have strong incentives to obtain and exploit market power, and that they will be indifferent between exploiting labor market power and product market power. If a firm can charge a monopoly price, it will; and if it can pay a monopsony wage, it will. That also means that if antitrust enforcement is oriented toward product competition, then firms will be naturally driven toward exploiting opportunities on the labor side—and capital will flow toward the firms that face those opportunities. So economic theory tells us not only that firms will exploit labor market power. It tells us that firms are more likely to exploit labor market power than product market power in the United States today because the expected sanctions are so much lower in the first case than in the second. And it tells us that the government should enforce antitrust laws in product markets and labor markets.

The evidence suggests that firms are quite aware that they can make profits by obtaining and exploiting labor market power. Recentstudies have shown that many labor markets are concentrated, and that wages, as one would predict, are lower in concentrated labor markets than in competitive labor markets. Moreover, concentration is far more serious in labor markets than in product markets; wage suppression is much more significant than price inflation. Studies have also revealed that firms will frequently use a covenant not to compete in settings where it is probably anticompetitive and illegal, and that the number of workers subject to a non-compete has been growing. Anecdotal evidence suggests that firms have used no-poaching and similar arrangements to minimize labor market competition, while the rise of no-poaching agreements within franchises has been documented statistically.

There is also a more far-reaching debate over whether the rise of market power explains many of the ills of our era, including stagnating economic growth rates, rising inequality, and political conflict. However this debate is resolved, it should not distract us from the simple point that labor monopsony, wherever it occurs, is a problem, and one that the FTC and the DOJ should urgentlyaddress.

There is another reason why the government needs to provide leadership: Private antitrust litigation against monopsonistic behavior is extremely rare. To provide a rough sense of the numbers, I searched the Westlaw database of antitrust cases for judicial opinions that included the words “labor market” and various standard antitrust terms (like “exclusionary”), and for opinions that included “product market” along with the same standard antitrust terms. The figure below shows the results:

These data are important because they tell us that the government failure to challenge monopsonistic practices is not offset by private litigation. Asymmetric enforcement in product and labor markets, both private and public, is even worse than we thought.

Why has there been so little private litigation? It might be tempting to argue that the lack of private litigation just tells us that labor monopsony and monopsonistic practices are rare. But the empirical studies tell us that labor monopsony is not rare, and it would require a strange theory of managerial behavior to claim that while firms eagerly engage in anticompetitive behavior on the product market side, generating hundreds of cases and enforcement actions, they refrain from doing so on the labor market side. Thus, the answer must lie in the incentives and practicalities of private litigation. Several factors come to mind.

First, labor market litigation is more difficult than product market litigation because of the commonality requirement of class actions. Judges certify classes only when the members of a proposed class are sufficiently similar in terms of the factual and legal predicates of the lawsuit. Most product market class actions involve commodities, and class counsel can easily persuade courts that consumers are similarly situated with respect to the commodities except in minor ways that can be addressed in damages calculations. For example, some consumers might have received discounts, or bought different quantities of the commodity, or received different warranties, but the damages algorithm can take account of these differences. In contrast, employment relationships vary across many dimensions. Some employees have more seniority than others; some have different terms in their contracts, for example, covenants not to compete; some have different responsibilities and tasks; and so on. Such variation does not rule out a class action, but it does increase the risk that class certification will be denied.

Second, classes of workers will, on average, be smaller than classes of consumers. Similarly situated workers will typically be found in a single geographic market, defined for example by county lines or commuting distance, while nationwide consumer class actions are common. Because class sizes for workers are smaller, damages will also tend to be smaller, which means that worker class actions will frequently not be financially viable for the lawyers who fund them.

Third, price information for products is usually public—for commodities and many services (for example, airline ticket prices), it is always public. This means that the price increases are immediately detected, and hence litigation is easily commenced. Wage information is not normally public information, and employers frequently discourage workers from sharing information about wages.

Fourth, product market litigation often involves a natural corporate plaintiff that is willing to finance a lawsuit. For example, when manufacturers raise prices, the immediate victims may be distributors who can bring an antitrust lawsuit. In contrast, there is rarely a natural corporate plaintiff for litigation against labor monopsonists. Only occasionally, a firm might claim that another firm has erected a barrier against entry by tying up workers with covenants not to compete and long-term contracts. Such lawsuits exist but are rare.

Fifth, there may be doctrinal problems special to labor market cases. In product market cases, the methods for defining markets are well understood, and because consumer goods are often fungible or nearly so, courts accept product market definitions based on broad classes of goods. In contrast, the definition of labor markets is subject to controversy in the economics profession, and courts have rarely weighed in. Because employees are not fungible, change occupations from time to time, and vary in their toleration of commuting times, labor markets can be hard to define with the precision required for adjudication.

These barriers to private antitrust litigation against labor monopsonists help explain why such litigation is so much rarer than product market litigation. They also justify an increased role for the FTC and the DOJ. Indeed, they suggest that the government should devote more resources to labor market litigation than to product market litigation. Such efforts would not only improve competition in the labor markets on which the government focuses. They would also, by establishing new laws and ferreting out currently hidden anticompetitive practices, enable follow-on private litigation that would enhance competition in other markets.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Is Market Price Relevant for Minority Shareholder Appraisal Actions?https://promarket.org/is-market-price-relevant-for-minority-shareholder-appraisal-actions/
Thu, 08 Nov 2018 19:04:00 +0000https://promarket.org/?p=10248Vice Chancellor Travis Laster of Delaware Chancery Court has recently cautioned that while courts have given greater deference to market price in appraising fair value, this approach does not elevate “market value” to the governing standard under Delaware’s appraisal statute. The Judge asked for further economic evidence and framework, and his caveat begs at least three questions, write Dirk Hackbarth and Bin Zhou.

The appraisal remedy in US corporate law gives dissenting shareholders in a completed cash-out merger the right to an independent judicial determination of the “fair value” of their shares and buy-back of their shares by the acquiring firm at this “appraised” fair value with accrued interest. Recent decisions in Delaware’s Supreme Court and Chancery Court have reignited an important legal and policy debate about the fair value statute. In contrast to decisions between 2012 and early 2017 in which primarily “discounted cash flow estimates” pinned down fair value, the most recent decisions have given greater deference to market evidence.

For example, Vice Chancellor Laster’s February 2018 decision in Verition Partners v. Aruba Networks ruled that the most reliable estimate of fair value of Aruba Network’s stock was the 30-day average leading up to HP’s offer (“market price”) of $17.13, more than $7 per share less than HP’s offer (“deal price”) of $24.67. The Court rejected the dissenting (minority) shareholders’ discounted cash flow estimate because it (i) “likely was tainted by human error,” and (ii) “continues to incorporate an element of value derived from the merger itself: the value that the acquirer creates by reducing agency costs.”1)See “Has appraisal litigation gone from can’t-lose to no-win for shareholders?” Reuters, March 1, 2018.

From an economist’s perspective, these holdings are significant, as judges are increasingly embracing market price in fair value determination under Delaware’s statute. This trend suggests at least three related law and finance questions. First, is market price relevant for appraising fair value of publicly traded companies where there is no controlling shareholder?Second, should market price in such circumstances be given exclusive reliance for fair value determination? Third, if not exclusively, what evidence should be used to assess the weight given to market price, relative to other indicators of fair value?

1. Is Market Price Relevant for Fair Value Determination?

We argue that the answer to the first question is an unequivocal “yes.” Decades of empirical finance research establishes that in the US stock market, publicly available information about companies is quickly reflected in stock prices. Although courts acknowledge that stock markets are in general efficient, they insist that fair value under Delaware statute is a jurisprudential, rather than purely economic, construct. This concept has certain nuances that neither an economist nor market participant would usually consider when either valuing a minority block of shares or a public company as a whole. Because the average investors have no influence over the company’s business strategies and operations, Delaware courts have frequently held that, relative to Delaware’s fair value, there is an implicit minority discount in the US market price. This view, however, is misconceived.

Minority Discounts Cannot Be Inferred From Control Premiums

Courts and practitioners often derive minority discounts as the inverse of acquisition premiums; for example, for a deal premium that is 40 percent, the minority discount would be 1-1/(1+40 percent) = 28.6 percent. However, there is not a one-to-one or even a negative relation between a control premium and a minority discount. The premium of deal price over market price, or the acquisition premium, is often mistakenly called a control premium, because the buyers in mergers and acquisitions acquire control of the target companies. This is a misnomer, however, as acquisition premiums represent a variety of factors—synergies with the acquiring company, undervaluation of the target company and overpayment by the acquiring company—that have nothing to do with implicit minority discounts in the market prices.

Minority Discounts Should be Close to Zero as a Base Case in the US

Some investors pay a premium to the market price for a control block of stock if they anticipate receiving benefits that do not flow to other (non-controlling) shareholders. These benefits are commonly referred to as private benefits of control and control premiums in economics literature. Because any private benefits of control need not harm minority, non-controlling shareholders and because controlling shareholders can provide valuable benefits for minority shareholders, it is an open question whether in a particular target company there should be any minority discount and, if so, what its magnitude should be.

There are typically two approaches to measure minority discounts. The first approach examines the relationship between firms’ market-to-book ratios and their ownership concentration. A low market-to-book ratio would be consistent with uncompensated expropriation of cash flows by a dominant shareholder. It would mean that the firm has invested assets (book value) that are not highly valued by the market (market value). The second approach is to measure the relationship between firms’ accounting rates of return and ownership concentration. The rationale is that if a large shareholder is expropriating cash flows it will be reflected in lower accounting cash flows. Consistent with the above discussion, researchers generally find no systematic evidence on minority discounts in the United States.

2. Should Market Price Be Considered Exclusive Evidence?

As Vice Chancellor Laster also emphasized in his Aruba decision, we note that market price as baseline indicator of fair value does not mean that there cannot be an appraisal for a publicly traded company receiving a premium offer. For example, if certain material, non-public information has not been incorporated into the price, and that information can be considered part of the “operative reality” under the Delaware statute, market price should not be the exclusive evidence for fair value. So our answer to the second question is “not necessarily.”

The Delaware statute requires recognition of all relevant factors for the determination of fair value. Hence, there is a continuum of possible combinations of market prices, adjusted deal prices, and discounted cash flow estimates. The reliability of market price as indicator of fair value should be evaluated against its own merits, and against the merits of other fair value measures. In particular, in deciding the best indicator of fair value, the Courts acknowledged that the latter two indicators are subject to human errors and judgment. Notably, there are exceptions such that deviations from exclusive reliance of market price are clearly warranted. However, this requires an economic framework that empirically quantifies reliability of (and weight on) market price.

3. Market Efficiency Tests for Appraisal Cases

To address the third question about weight given to market price, and to respond to theCourt’s invitation of expert opinions, we propose three sets of indicia for fair value: a) liquidity and market microstructure; b) corporate governance; and c) accounting transparency. Part (a) of our proposed tests is an extension of the tests used in securities litigation. Parts (b) and (c) of our tests are proposed to establish or refute the Delaware Court’s historical suspicion of an implicit minority discount in the stock price. Cross-sectional comparisons can be easily shown in histograms to see how the target company’s measures at a point in time stack up against its peers or the market. Time series plots of the target’s measures can be used to detect any abnormal patterns over time. Potentially, when the signals from each measure individually are conflicting with each other, regression analyses of various variables listed above could be performed to measure the combined effects of the proposed factors on the target company’s stock. These types of analyses could be used either as a more sophisticated test of market efficiency for the appraisal actions, or as an alternative market-based measure of fair value.

In sum, we conclude that Courts may rely more on market price in appraising fair value of stocks that are actively traded on a US stock exchange and where there is no controlling shareholder. In response to the Court’s invitation of expert opinions, we propose a number of cross section and time series tests that can give guidance as to reliability of market price as indicator of fair value. In particular, in addition to market efficiency tests commonly used in securities litigation, we suggest a complementary set of tests that focus on market and company fundamentals, such as liquidity, corporate governance, and transparency.

Dirk Hackbarth is a professor of finance and an Everett W. Lord Distinguished Faculty Scholar at the Boston University Questrom School of Business.

Bin Zhou is a principal at The Brattle Group.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Editors’ Briefing: This Week in Political Economy (October 27-November 4)https://promarket.org/editors-briefing-this-week-in-political-economy-october-27-november-4/
Sat, 03 Nov 2018 23:41:23 +0000https://promarket.org/?p=10217Facebook is still open to manipulation by malicious political actors; the dialysis industry has spent over $100 million to fight a ballot measure that seeks to regulate it; AT&T does everything it promised not to do in its defense of the Time Warner merger; and can tech workers help police their own employers?

With the midterms only days away, all eyes are on Facebook’s efforts to combat voter manipulation and suppression. So how is it going? Notsogreat, it turns out. Despite Facebook’s promises to make political advertising more transparent by disclosing who pays for political ads, a Vice investigation by William Turton found that the “paid for by” feature “is easily manipulated and appears to allow anyone to lie about who is paying for a political ad, or to pose as someone paying for the ad.” The Vice team attempted to buy fake ads on behalf of all 100 sitting US senators, and all of them were approved, “indicating that just about anyone can buy an ad identified as ‘Paid for by’ by a major US politician.” A previous test by Vice also succeeded in purchasing Facebook ads on behalf of Vice President Mike Pence and ISIS, and a similar test by Business Insider’s Shona Ghosh managed to run ads as being “paid for” by Cambridge Analytica, showing that Facebook is still “open to manipulation by bad actors.” ProPublica has also identified “12 ad campaigns in which energy, insurance and other industries masked their sponsorship of political messages on Facebook.”

Days after last week’s synagogue massacre in Pittsburgh, reports The Intercept’s Sam Biddle, Facebook still allowed advertisers to target users interested in “white genocide.” The Intercept, he writes, “was able to select ‘white genocide conspiracy theory’ as a pre-defined ‘detailed targeting’ criterion on the social network to promote two articles to an interest group that Facebook pegged at 168,000 users large and defined as ‘people who have expressed an interest or like pages related to White genocide conspiracy theory.’” Once reached for comment, Facebook “promptly deleted the targeting category, apologized, and said it should have never existed in the first place.”

Facebook did, however, ban ads from Bloom, “an online identity management service with a focus on credit scoring.” In an interview with CNBC, Bloom’s co-founder said he believes Facebook banned the company’s ads because its service competes with Facebook’s own identity service, Facebook Login.

Members of the British and Canadian Parliaments are joining forces to hold an unprecedented joint “international grand committee on disinformation and fake news,” in the hopes of getting Facebook CEO Mark Zuckerberg to testify after he previously refused requests by both parliaments to appear in person. In the US, writes The Verge’s Makena Kelly, lawmakers are “still figuring out exactly what fixing privacy might mean” six months after Zuckerberg testified before Congress. Meanwhile, the UK’s Chancellor of the Exchequer, Philip Hammond, unveiled a proposed 2 percent tax on the revenues that tech giants earn in Britain. The tax, said Hammond, will apply to search engines, social media platforms and online marketplaces that generate at least £500 million in global revenues—meaning Amazon, Facebook and Google.

Facebook’s latest quarterly report proved to be a mixed bag, after the company beat expectations on earnings but also revealed that, following two years of numerous privacy scandals, its user growth is slowing and it is losing users in Europe. In a subsequent earnings call, Zuckerberg seemed to suggest that Facebook “could be unrecognizable by 2020,” writes Alexis C. Madrigal in The Atlantic. In Bloomberg, however, Leonid Bershidsky argues that Facebook is “merely turning into an Apple lookalike, profiting from network effects rather than from disruptive innovation or any kind of residual positive vibe from its brand.” Zuckerberg himself, writes Farhad Manjoo in the New York Times, is secure in his position as “one of the most powerful unelected people in the world. Like an errant oil company or sugar-pumping food company, Facebook makes decisions that create huge consequences for society—and he has profited handsomely from the chaos.”

In other midterms news: the dialysis industry has spent $111.4 million to oppose California’s Proposition 8, which aims to rein in dialysis costs, reports David Dayen in The Intercept. Rep. Steve King (R-Iowa), a staunch racist who has been rebuked for his white supremacist rhetoric by the GOP’s campaign chief, has lost a number of corporate donors in the past two weeks, among them Intel, Land O’Lakes and Purina. And a “dark money loophole” has allowed a Texas super PAC called Texas Forever to pump $1.29 million into TV ads attacking Republican Senator Ted Cruz.

How will the economy affect the midterms? “The competitive districts that will decide control of the House are richer and more economically vibrant than the country as a whole. But there is little evidence that the thriving economies in those districts are buoying Republican candidates enough to guarantee victories against well-funded Democratic challengers,” report Jim Tankersley and Ben Casselman in the Times.

Susan Molinari, Google’s top lobbyist in Washington for the past seven years, is stepping down.

Nearly 17,000 Google employees all over the world staged a massive walkout to protest the company’s handling of sexual harassment, following last week’s exposé by the New York Times that revealed Google protected executives accused of sexual misconduct and paid them millions in exit packages. “Google’s famous for its culture. But in reality we’re not even meeting the basics of respect, justice and fairness for every single person here,” one Google employee told the Times. Silicon Valley workers, argues the Financial Times’ editorial board, are emerging as a “powerful voice for good” and “can help to police their employers.”

In the New Yorker,Anand Giridharadas explores the battle between two Silicon Valley billionaires—Salesforce CEO Marc Benioff and Twitter CEO Jack Dorsey—over Prop C, a San Francisco ballot measure that aims to raise taxes on tech firms and other large businesses to pay for homeless programs. Ostensibly, the public spat between the two is over how to best deal with the homeless problem in San Francisco, where there are “about a hundred homeless San Franciscans for every billionaire.” But the argument, writes Giridharadas, really revolves around “democracy, wealth, power, and those their revolution has forsaken and displaced.”

Two more signs that AT&T is breaking the promises it made in defense of its merger with Time Warner: it killed FilmStruck, the streaming service for classic movies, and it pulled HBO and Cinemax content off of Dish’s satellite service—“the first time in HBO’s more than four-decade history that programming has been blocked at a distribution partner over a contract dispute.”

From Equitable Growth’s excellent and highly-recommended blog series “Competitive Edge”: ahead of Thursday’s FTC hearing on antitrust’s consumer welfare standard, Jonathan Sallet explains how the consumer welfare standard came to be and why protecting the competitive process would be “the next step in the evolution of antitrust.”

Warren Buffett’s Berkshire Hathaway bought back $928 million of its own stock.

From the New York Times: The Fed wants to loosen regulations for 16 financial institutions with assets worth between $250 billion and $700 billion, including US Bancorp, Capital One and American Express, as part of the Trump administration’s efforts to roll back financial regulations. In an interview with CNBC, Sen. Sherrod Brown (D-Ohio) says Democrats are playing “defense” against the GOP’s attempts to deregulate Wall Street.

The New York Times’ Lisa Friedman offers a complete guide to the half-dozen ethics investigations concerning Interior Secretary Ryan Zinke.

From the Washington Post: the big secret about the Affordable Care Act is that “it’s working just fine.”

The US-China trade war has been mostly focused so far on products like agricultural goods and household appliances, but what the US and other democracies should really worry about is China’s digital authoritarianism, argue Freedom House’s Michael Abramowitz and Michael Chertoff in the Washington Post.

Stigler Center Goings-On

“Economists have always been fond of Uber,” writes The Economist in its coverageof the Stigler Center’s working paper on the costs of ride-sharing, but “if economists subjected Uber and its competitors to a cost-benefit analysis, they might not be so impressed.”

The short-term political interests of Italy and the EU “are in a collision with their long-term political and economic interests—not to mention the global economy’s,” writes Luigi Zingales in the New York Times.

From Chicago Booth Magazine: ProMarket editorial board member Guy Rolnik’s class “prepares future entrepreneurs for the noneconomic influences that can doom or propel a good idea.”

In the latest episode of Capitalisn’t, journalist and author Glenn Greenwald (who lives in Brazil) tells Kate Waldock and Luigi Zingales how rampant corruption, violent crime and a struggling economy have given rise to Jair Bolsonaro and Brazil’s radical right.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Does Going to War Increase Veterans’ Religiosity?https://promarket.org/does-going-to-war-increase-veterans-religiosity/
Fri, 02 Nov 2018 22:48:27 +0000https://promarket.org/?p=10125Are there really no atheists in foxholes? A new paper looks at the effects of military combat on American service members’ religiosity—and its results do indeed offer some support for that old adage.

The United States is the most religious developed nation in the world. According to data from the General Social Survey, nearly 90 percent of American adults claim a belief in God, 44 percent attend religious services at least once per month, and 73 percent assert a belief in life after death. Learning to cope with man’s mortality is central to nearly all major religious teachings. However, very little is known about the impact of life-and-death trauma on religiosity.

War is a life-and-death struggle that generates substantial trauma to service members and their families. Service people deployed to combat face imminent threat of injury and death, and may witness or participate in causing the deaths of enemy combatants, civilians, and comrades-in-arms.

In our new National Bureau of Economic Research working paper, “Death, Trauma and God: The Effect of Military Deployments on Religiosity,” we explore whether an old adage is true: are there really no atheists in foxholes? The effect of life-threatening trauma on religiosity is ex ante uncertain. Fear of death or war-related psychological trauma (including post-traumatic stress disorder) may cause combat veterans to question, or even abandon, religious faith as life-and-death experiences challenge religious doctrines of good and evil. This may cause combat veterans to substitute away from religion and toward secular counseling or even toward risky health behaviors, such as illicit drug use, to numb emotional pain. Alternatively, fear of death and the adverse psychological effects of war could increase religiosity by increasing the demand for social support networks or doctrinal philosophies that promise life after death. In addition, combat could create tighter bonds among service members that generate religious peer effects. Combat deployments may also provide opportunities for military chaplains stationed in combat zones to proselytize in environments where competition from secular counselors is more limited.

The manner in which the US military assigns service members to combat generates the unique conditions for a “natural experiment” that allows us to estimate the causal impact of war-induced life-and-death trauma on religiosity. This experiment boils down to a US Armed Forces philosophy that runs deep; colloquially, “a soldier is a soldier is a soldier.”

Human Resources Command (HRC), which handles assignments of servicemen to their units and assignments of those units to deployment duties, treats branch-specific servicemen of identical military rank and primary military occupation specialty as essentially perfect substitutes for the purposes of these assignments. Senior commanders decide when, where, and for how long to deploy units based on (i) the state of operational environment, which is dictated by world events, and (ii) the readiness and availability of suitable units, determined by equipment availability, timing of training completion, and the occupational composition of unit members (Army Regulation 220-1, 2010). These are largely exogenous factors beyond an individual service member’s control. HRC does not consider personal preferences, religious practices, personality, or family background characteristics in assigning service members to units or deploying units overseas. Service members of identical military rank and occupation (within service branch) are essentially “randomly” assigned to their deployment duties, creating ideal conditions for our natural experiment (Lyle 2006; Engel et al. 2010; Cesur et al. 2013; Sabia and Skimmyhorn 2018).

To examine the impact of military deployments on religiosity, we use two data sources: (1) the 2007–8 military module of the National Longitudinal Study of Adolescent and Adult Health (NLSAAH), and (2) the 2008 Department of Defense Survey of Health and Related Behaviors Among Active Duty Personnel (HRB). These surveys collect a wide set of information on military deployments, war experiences, psychological and physical health, and religiosity. First, using the NLSAAH, we examine a sample of 482 military servicemen ages 24 to 34 who had served or were currently serving on active duty. Among this group, we find that 76 percent reported deployment assignments to combat zones and 24 percent reported deployment assignments exclusively to non-combat zones. These deployments occurred largely during the post-9/11 wars in Afghanistan and Iraq. Among those assigned to combat zones, 49 percent reported engaging the enemy in firefight during war deployments. In addition to these measures of war experiences, we also look at several measures of religiosity among servicemen, including whether and how frequently they attended religious services, the importance of religion to them, and the frequency with which they prayed during the week (outside of religious services).

An important advantage of the NLSAAH data is that it is longitudinal in nature. Thus, we can observe the religiosity of deployed servicemen before they enlisted in the Armed Forces and test whether those deployed to combat were different in their religiosity than those deployed to non-combat operations prior to their enlistment. We find no evidence that they differ in pre-enlistment religiosity.

Results from the NLSAAH show that servicemen assigned to combat zones are 8.9 percentage points more likely to attend weekly religious services in the past year than their counterparts deployed to non-combat zones. Those assigned to combat are also 8.9 percentage points more likely to engage in private prayer, and 4.3 percentage points more likely to report religion is important to them. These estimates are consistent with the hypothesis that life-and-death shocks induce increases in both religious service attendance as well as private religious practices. We also explore whether the effects differ by whether the combat serviceman had separated from the military at the time of the NLSAAH survey. We find that the impact of combat assignment on religious attendance and private prayer is statistically equivalent for those whose active duty service was ongoing at the time of the NLSAAH and those who had separated from the military. This could suggest that the impact of combat on religious practices persists over time.

Next, we turn to the Department of Defense’s 2008 HRB survey. These data are designed to be representative of active duty service members in all branches and pay grades of the US Armed Forces. Thus, a key advantage of these data are that they are more representative of the entire US military than the small NLSAAH sample. Our analysis sample consists of 11,598 respondents and includes information on both military deployments and religiosity. This large sample allows us to explore whether the effects of combat on religiosity differ among subgroups of servicemen, including those serving in particular branches and of particular ages. Important disadvantages of these data are that they are not longitudinal in nature and lack detailed occupation information.

In the main, our findings from the HRB survey largely confirm our NLSAAH results. We find that engaging the enemy in firefight is associated with a 1.9 percentage-point increase in the probability of frequent religious attendance, a 1.4 percentage-point increase in the likelihood of prayer at times of stress or depression, and a 1.9 percentage-point increase in the probability that a serviceman reports that religion is important. The magnitudes of these estimates are somewhat smaller than those obtained from the NLSAAH, which may be explained, in part, by differences in measures of combat assignment. It may also reflect that those who are deployed to combat zones, but not actually exposed to combat, experience increases in religiosity due to fear of life-and-death trauma, or engagement with military chaplains. In addition, we find that being physically wounded in war has a particularly large impact on religiosity. This finding suggests that demand for religion rises sharply in response to physical trauma.

For whom are the religious effects of military deployments largest? Our results suggest that the effect of combat on religiosity is generally larger for soldiers, marines, and sailors as compared to airmen. This is consistent with evidence that the psychological costs of combat are largest for those in the Army and Marines as compared to the Air Force. In addition, we find that these religious effects are largest for younger enlisted servicemen (ages 18 to 24). For officers and older servicemen, there is much less evidence of a turn to religion in response to combat deployments.

We posit that there may be many interrelated mechanisms to explain our findings: (1) servicemen seeking out religious organizations and doctrines to cope with fear of death, (2) adverse psychological effects of war, including PTSD, (3) physical wounding in war, (4) religious peer effects forged by bonds created among combat veterans, and (5) the role the US military itself, wittingly or unwittingly, in nudging servicemen toward religiosity via chaplain services in combat zones. When we empirically try to disentangle some of these channels, we find that the roles of psychological trauma and physical wounding in war are particularly important.

We cannot rule out that the role chaplains play may be important as well. As part of a strategy to aid service members at risk of exposure to war-related trauma, the US Department of Defense funds religiously based counseling services for service members via the military chaplaincy. A 2006 Congressional report concluded that there were 2,859 regular duty chaplains and 1,740 reserve chaplains serving as members of the Armed Forces (Jindal 2006). There is a vigorous policy debate about how well the US Armed Forces has achieved a proper balance in making spiritual services available for those who demand them, while not using publicly funded resources to proselytize for a particular religion. Some argue that the presence of chaplains in combat has led to unconstitutional proselytizing and endangered combat veterans’ mental health. On the other hand, others argue that chaplains are essential not only to meeting the demand for religion by servicemen, but also for successful completion of military operations. While our findings suggest that combat-induced religiosity is not solely, or even largely, attributable to chaplain-induced demand, the role of chaplains in providing counseling services remains a military policy issue worthy of further study.

Travis Freidman is a PhD candidate in Economics at the University of New Hampshire, Resul Cesur is Associate Professor of Healthcare Economics at the University of Connecticut, and Joseph J. Sabia is Professor of Economics & Director of the Center for Health Economics & Policy Studies at San Diego State University and the University of New Hampshire.

References

Army Regulation 220-1, 2010. Army Unit Status Reporting and Force Registration—Consolidated Policies. Headquarters of the Department of the Army, Washington DC, http://www.apd.army.mil/pdffiles/r220 1.pdf

Sabia, Joseph J. and William Skimmyhorn. “War! What is it Good For? The Effect of Combat Service on the Economic Transitions of Veterans.” Economic Self-Sufficiency Policy Research Institute Working Paper (2018). Available here.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.

]]>Brazil’s Election Is Yet Another Indication That Facebook Is Too Big to Managehttps://promarket.org/brazils-election-is-yet-another-indication-that-facebook-is-too-big-to-manage/
Wed, 31 Oct 2018 11:42:48 +0000https://promarket.org/?p=10177Facebook’s failure to curb the massive disinformation campaign that preceded Jair Bolsonaro’s election victory shows that it is unable to control the dangerous consequences of its own dominance.

The Brazilian elections were supposed to be the event that finally turned the tide in Facebook’s ongoing battle against disinformation. Following two years of intense scrutiny and eager not to repeat the mistakes of 2016, the company clearly wanted to position Brazil’s presidential election as a showcase for its vigilance and improved abilities to combat the spread of fake news and propaganda. It invited reporters into its “war room,” banned hundreds of thousands of accounts, and touted the efficiency of its own efforts.

The election of Jair Bolsonaro and the massive fake news campaign that preceded it, however, showed something quite different. Instead of being a story about Facebook’s triumph, Brazil now joins Myanmar, India, the Philippines,the US and Brexit as yet another indication that Facebook is either unable or unwilling to curb the weaponization of its platforms by malicious political actors.

It also served as a stark reminder why far-right authoritarians love Facebook so much to begin with. In March, after Italy’s far-right Northern League won 17 percent of the vote in Italy’s general election and became the country’s de facto kingmaker, party leader Matteo Salvini felt it necessary to credit Facebook for Lega‘s stunning electoral achievement. “Thank God for the internet, thank God for social media, thank God for Facebook,” said Salvini, a social media savant who has made effective use of Facebook to amplify his party’s anti-immigrant agenda, turning himself into Italy’s most popular politician in the process.

Bolsonaro, a far-right extremist who favors torture and extrajudicial killings and regularly expresses nostalgia for Brazil’s military dictatorship, didn’t immediately praise Facebook following his election victory on Sunday. He did, however, take to Facebook Live for his first post-campaign statement, in which, among other things, he confirmed that he intends to follow up on his campaign promise to purge his political opponents from the left. (Bolsonaro later addressed TV networks with a second victory speech that was markedly different).

Bolsonaro’s choice to make his first address as president-elect via Facebook, instead of opting for the traditional press conference, was telling. Much like other far-right authoritarians, Bolsonaro’s campaign, which began as little more than a curiosity, relied heavily on social media, completely bypassing traditional media outlets (among his favorite targets). Much of this activity took place on Facebook, including near-daily Facebook Live videos. But the real action took place on WhatsApp, which is owned by Facebook and is Brazil’s most dominant social platform and messaging service, with a penetration rate of close to 100 percent of internet users.

WhatsApp is where over 40 percent of voters in Brazil—including 60 percent of Bolsonaro’s voters—get their news from. It is also where, in the run-up to the election, supporters of Bolsonaro inundated voters with hundreds of millions of WhatsApp messages containing false news items and conspiracy theories about his rival, Fernando Haddad. Supporters used scraping software to collect people’s phone numbers and, according to The Guardian, overseas numbers to bypass WhatsApp’s spam-detection tools and send messages in bulk, resulting in a “tsunami” of fake news. Bolsonaro himself professed ignorance, despite reports that the effort was bankrolled by business groups that supported him. (Bolsonaro enjoyed the support of the country’s business elite and reportedly won 97 percent of the country’s richest cities).

Since WhatsApp is an end-to-end encrypted service, it is difficult to measure the scope and reach of the fake news campaign. But according to one study that examined more than 100,000 images that spread through WhatsApp groups focused on Brazilian politics, among the 50 images that were most widely shared, only 8 percent were truthful, and over half were either misleading or completely false.

The problem was compounded by the fact that many in Brazil consider WhatsApp be more trustworthy than traditional news outlets. It certainly didn’t help that newspapers found it difficult to share their content through the app. In a recent piece (translated from Portuguese by the Global Editors Network), Brazilian journalist Pedro Doria, the former executive editor of O Globo, wrote that WhatsApp blocked some newspapers from sending news articles to their readers, considering the messages to be spam. This, he writes, was “directly connected” to the events that unfolded during the campaign:

“Since the press can’t use WhatsApp to distribute its legitimate content to millions of people, the ones using it to do so are unknown individuals or companies that work in the shadows. It is not possible to spread news articles, but it is more than possible to spread misinformation.”

As big as it was, it is unclear just how much of an effect the disinformation campaign had on the final result. The reasons why Bolsonaro’s neofascist agenda found a receptive audience among Brazilian voters are complex and deep-rooted and probably have more to do with extreme inequality, an inherently corrupt political system, and a skyrocketing murder rate. (You can hear Glenn Greenwald explain the background for Bolsonaro’s victory to Luigi Zingales and Kate Waldock here).

Likewise, there are complex social, political and cultural causes for the rise of Italy’s far-right, and for the rise of other populist authoritarians like President Trump in the US, Narendra Modi in India and Rodrigo Duterte in the Philippines, all of whom benefited from the spread of fake news on social media. While Facebook is much-loved by far-right authoritarians, it is far from the only, or even main, factor behind their rise.

But regardless of its actual impact on the election’s results, Facebook’s failure to curb the onslaught of fake news in Brazil matters, simply because this time it made a larger, more concerted effort—and still came up short.

Unlike previous cases where it failed to respond in time to the spread of misinformation and propaganda on its platforms, Facebook attempted to show that it took its impact on the Brazilian election very seriously. WhatsApp banned more than 100,000 accounts (including Bolsonaro’s own son), sent cease and desist letters to the marketing companies that were reported to be behind the disinformation effort, reduced its forwarding limit in Brazil from 256 users to 20, and launched an ad campaign with tips on how to spot fake news. WhatsApp CEO Chris Daniels took to the pages of Folha de São Paulo to publish an op-ed in which he acknowledged the company’s responsibility to “amplify the good and mitigate the bad.” (Even with the recent limits, cautioned Daniels, “both good and bad” information could still go viral). The company was “delighted to see how efficient we were able to be, from point of detection to point of action,” Facebook’s head of civic engagement, Samidh Chakrabarti, told reporters earlier this month.

Ultimately, however, Facebook proved unable to stop the overwhelming current of false news. Partly, this is due to the flawed nature of its response. As Vice‘s Noah Kulwin reported in January, experts in Brazil have been warning for a long time that WhatsApp is a prime target for political actors interested in hijacking it for propaganda purposes. But when some experts contacted WhatsApp before the election to suggest immediate measures, the company reportedly “responded by saying that there was not enough time to implement the changes.” Then there was Facebook’s odd choice to manage the crisis from its corporate headquarters in California. According to Vice, WhatsApp, which doesn’t have any employees in Brazil, didn’t even send a representative to a meeting of the Superior Electoral Court in Brasilia in which the impact of fake news on the election was discussed—instead, a WhatsApp executive participated via video-conference from her office in Silicon Valley.

But the company’s failure in Brazil is also yet another piece of evidence that, as Siva Vaidhyanathan said in a recent interview with ProMarket, Facebook is simply “too big to manage.” Moderating content generated by 2 billion people living in hundreds of countries, using hundreds of languages across multiple platforms, is a daunting task, one that no other company has ever attempted (and one that is unlikely to be accomplished with two dozen people huddled in a dark room in Menlo Park).

In August, Motherboard’s Jason Koebler and Joseph Cox published a wide-ranging investigation into Facebook’s content-moderation practices. Facebook’s content moderation-related problems, they wrote, come in various forms:

“There are failures of policy, failures of messaging, and failures to predict the darkest impulses of human nature. Compromises are made to accommodate Facebook’s business model. There are technological shortcomings, there are honest mistakes that are endlessly magnified and never forgotten, and there are also bad-faith attacks by sensationalist politicians and partisan media.”

The Brazil case seems to embody many of these failures. One of its main takeaways is that even when Facebook makes a considerable effort to limit the proliferation of conspiracy theories and hate speech, it is still unable to respond effectively. This was also evident in Myanmar, where the military launched a years-long disinformation and incitement campaign targeted against Rohingya Muslims that turned the social network into a “tool for ethnic cleansing.” According to a recent Reuters investigation, despite the measures that it took over the past year to fight anti-Rohingya incitement in Myanmar, Facebook seems to be “losing the war” there as well.

To be sure, further study is needed to accurately determine what role Facebook played in Brazil’s election. Yet the events surrounding Bolsonaro’s victory, and Facebook’s failure to prevent the hijacking of its platforms, demonstrate the company’s inability or unwillingness to mitigate the consequences of its own dominance, which is why it remains the weapon of choice for aspiring autocrats and would-be manipulators of public opinion.

For more on Brazil’s election, check out the following episode of the Capitalisn’t podcast:

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.